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Prices down, rates up, Housing starts wobble

Prices down, rates up, Housing starts wobble

July 11, 2013

Timber Industry Report
By Rick Sohn, PhD
Coquille LLC

Good news/bad news. Product prices are down and mortgage rates are up. Housing starts are lackluster, but unsold inventory is down. Seven-year trend of lumber, logs, housing, and mortgage statistics are shown below.

chart-sohn-july13

Interpretation
The housing recovery has entered a readjustment phase. Product prices have decreased one third in just two months, reacting to over-supply, from a high of $445 down to $290 per Thousand Board Feet. There has been an equally dramatic increase in the 30-year fixed rate mortgage – a half percentage point rise in the last week alone, and a and a full percentage point rise in the last 7 weeks.

Housing Starts and Building Permits are also down, compared to the regular monthly records over the last year.

In good news, Median home prices continue to inch up, but are still well below previous highs. And unsold home inventories have continued to drop, now to their lowest level in 7 years – 2.5 months.

Good news/bad news also involves log prices, which normally trail product prices. Log prices tracked here, have stayed within a $20 range between January and June, after an $89 rise from December to January 2013, and a $37 rise from October to December. But the latest drop in product prices, if it holds for the rest of the building season, suggests that log prices will drop quite a bit further in the next few months.

If you are a mill, the combination of slowly adjusting log prices and decreasing product prices creates a squeeze on net income.

Industry economic analysts at a session hosted by Northwest Farm Credit Services, expressed optimism about the future of log and lumber consumption and prices, over the next 3-5 years. However the industry itself remains skeptical, and Random Lengths this week, reported “10 reasons to be cautious about the housing recovery.” The reasons include the rise in interest rates, and a drop in the percentage of home ownership from 69.1% to 65% and an accompanying increase in apartments being built, which require only about one third as much wood as a home.

Weyerhaeuser has shown its strong optimism with the long term wood products business recently. They purchased the Longview Timber lands, located in the Northwest. This purchase, for $2.65 billion, added 1/3 to its Pacific Northwest holdings, an addition of 645,000 acres. This brings Weyerhaeuser’s total for the Pacific Northwest to 2.6 million acres, and, and nearly 21 million acres in North America.

There is a breather in some parts of the recovery, according to the economists, and the pent up demand of people to own a new house, the overall trend of the wood products industry should remain very positive over the next few years. Most likely, the slowdown in some sectors is seasonal and the result of rebalancing inventories and production that creates growing pains.

Data reports used with permission of:
1) Random Lengths. Through Sept. 2012, 2”x4”x8’ precision end trimmed hem-fir stud grade from Southern Oregon mills. Starting Oct. 2012, consolidated with Kiln Dried Studs, Coast Hem-Fir 2x4x8’ PET #2/#2&Btr. Price reported is Dollars per Thousand Board Feet, generally the third week of the month. One “board foot” of product measures 12 inches by 12 inches by one inch thick.
2) RISI, Log Lines. Douglas-fir #2 Sawmill Log, Average Region 3 Southern Oregon price. Current report is for the prior month, in Dollars per Thousand Board Feet of logs, Scribner Scale. The standardized Scribner Scale includes expected saw trim waste, so a log board foot is much more wood volume than a product board foot.
3) Dept. of Commerce, US Census Bureau. New Residential Housing Starts and New Residential Construction Permits, seasonally adjusted, annual rate. Current report is for the prior month. Recent reports are often revised in bold. Also, major revision made each May, reaching 2 1/2 yrs back.
4) Regional Multiple Listing Service RMLSTM data, courtesy of Janet Johnston, Prudential Real Estate Professionals Broker, Roseburg, OR. Inventory of Unsold Homes (Ratio of Active Listings to Closed Sales) in Portland Oregon, for most recent month available.
5) Freddie Mac. Primary Mortgage Market Survey. 30-year Fixed Rate Mortgages Since 1971, national averages. Updated weekly, current report is for the prior full month.
6) Mortgage-X Most recent weekly rate of 30-year Fixed Rate Mortgages, national average.
7) Zillow.com Median value of homes sold in the United States during the month, weighted according toeach area population. The Median removes the effect of outlier expensive homes, with equal numbers of homes above and below the median value each month. Revisions in bold
Issue #6-6. © Copyright Rick Sohn, Umpqua Coquille LLC.

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Go Wood: Wood Science 101 (10) – Where Does Lumber Come From?

Wood Science 101 (10) – Where Does Lumber Come From?

One of the more interesting phenomena of today’s world is the insulation we have from the source of our sustenance, or raw materials. Many modern folk would have a hard time explaining where the natural gas in their home comes from, or how bread is made, or even what the very walls around them are made of.So when Mike Wolcott sent me some nice photos of what I call a “lumber log”, that is a re-constructed log made of the lumber and bark sawn from it, I thought it a good opportunity to share just a little bit of the story of lumber.

http://www.vincentkohler.ch/billon.html

This artistic work is a nice way to demonstrate in a visual way just where lumber comes from. One sees many different sizes of boards, and a cant in the center of the log; it begins to give one a sense of how many different products can be produced from a log depending on how the log is sawn up. And the placement of all cuts, and therefore the size and value of each board produced, depends most importantly on the very first cut into the log.

In the early 1970’s, the US Forest Service developed a computer program that mathematically calculated the highest volume of lumber that could be sawn from a log of specified dimensions based on what it called the “best opening face“.  Soon, computerized sawing equipment incorporated this computer algorithm into their equipment along with scanning technology that allowed the log to be spun and scanned prior to sawing, thereby allowing the computer to determine just exactly where that first critical cut should be made. The resulting “face” of the log. then, would produce the widest pieces of lumber, and subsequent narrower lumber would be produced as the log is turned.  In the photograph above, the sawyer, or the computer he operated, determined that the best first cut would be on what is the top of the log in the picture. The cut was made just at the edges of the top piece of bark, producing a “slab” from which the top two narrow boards were re-sawn. Then, once the slab was sent on its way, the two-by-six and two-by-eight pieces (the third and fourth boards from top) were sawn and sent on to an “edger” where the square edges of the boards were formed as the rounded corners were sawn away. The log was then rotated and sawing continued on the next face, with most of the pieces in this case being sent on to a “re-saw” or a “gang-saw” to produce the narrower strips you see.

Not long after the computerized saws were capable of producing the highest amount of lumber, or “yield” from a log, technologists figured out how to allow the mill operators to assign market values to the different sizes of lumber in “value tables” built into the software. This allowed the mill operator to then produce not the highest “yield” of lumber in board feet (one board foot is equal to a square piece of wood 12 inches long, by 12 inches wide, by 1 inch thick), but the highest value of lumber in dollars based on ever-changing current lumber market values.

This system works well for softwood lumber, for which most of the value is determined by the dimension of each piece. But in hardwood lumber production, the real value of the lumber is determined by the internal characteristics of the log…the number and size of knots and other defects, the coloring and figuring of the wood, and the surface area of “clear units” in each piece of lumber. These characteristics are determined again by the sawing technique used for each log. The three most common methods of sawing hardwood logs are called “plain or flat sawn” (the most common and highest yielding method), quarter-sawn (the most popular for certain applications where highly figured wood is desired), and rift sawn (used when straight-grained lumber is highly desired).

The following is an excellent high-quality educational video from the folks at the Frank Miller Lumber Company, an Indiana lumber producer that specializes in quartersawn hardwood. It provides a nice way to visualize the sawing process one has to try to imagine when looking at a piece of lumber. http://gowood.blogspot.com/2013/07/wood-science-101-10-where-does-lumber.html

And that’s how it’s done. Show the video to your kids, and then take them to the nearest lumberyard. You might be surprised how much fun you’ll all have.

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Wood product prices fall hard

Wood product prices fall hard

 June 12, 2013

By Rick Sohn,
Umpqua Coquille LLC

Zillow’s average home value is up $10,000 from its 2011 low. Building permits broke 1 million, finally, and unsold inventories are at a 7-year low. Interest rates may be starting back up, but are still historically VERY low. Seven-year trend of lumber, logs, housing, and mortgage statistics are shown below.

 chart-sohn-june13

Interpretation

Lumber price has fallen to $370 from $445 last month. According to Random Lengths, prices in many other solid wood products are also falling hard. Random Lengths reports that this was caused by a desire of wholesalers to build inventories, followed by a widespread satisfaction of that demand.

Log prices have fallen, but not much, compared to lumber. A continued fall in log prices would normally be expected next month, due to the double pressure of decreased demand for finished products, and increased log supply. But the early harsh fire season may cause inventory expansion by mills, and log prices could stabilize or fall less than in a normal year.

Home values reached a milestone, according to Zillow. From a low national average of $148,300 in Oct. and Nov. 2011, the price has come up $10,000 in 19 months, to $158,300.

Building Permits surpassed 1 million units for the first time since June of 2008 nearly 5 years ago. We are still waiting for a month when both starts and permits print above 1 million units in the same month.

Unsold inventories reached a new record low of 3.1 months in the Portland, Oregon market – a level not seen since 2006!!!

While the monthly average is down, the most recent 30-year fixed mortgage rate has turned up. An announcement by Chairman of the FED, Bernancke, that monetary policy could tighten up within the next year, will eventually lead to higher interest rates. This is the only dark cloud on the horizon (besides unrelenting high unemployment), that could slow homebuilding.

Data reports used with permission of:
1Random Lengths. Through Sept. 2012, 2”x4”x8’ precision end trimmed hem-fir stud grade from Southern Oregon mills. Starting Oct. 2012 the stud grade was consolidated with and is now reported as Kiln Dried Studs, Coast Hem-Fir 2x4x8’ PET #2/#2&Btr. Price reported is Dollars per Thousand Board Feet, generally the third week of the month. One “board foot” of product measures 12 inches by 12 inches by one inch thick.
2RISI, Log Lines. Douglas-fir #2 Sawmill Log Average Region 5 price. Current report is for the prior month. Dollars per Thousand Board Feet of logs are reported using standardized log measurements from the “Scribner log table,” which includes expected saw trim. This is much larger than a product board foot.
3 Dept. of Commerce, US Census Bureau. New Residential Housing Starts and New Residential Construction Permits, seasonally adjusted, annual rate. Current report is for the prior month. Recent reports are often revised in bold. Also, major revision made each May, reaching 2 1/2 yrs back.
4Regional Multiple Listing Service RMLSTM data, courtesy of Janet Johnston, Prudential Real Estate Professionals Broker, Roseburg, OR. Inventory of Unsold Homes (Ratio of Active Listings to Closed Sales) in Portland Oregon, for most recent month available.
5Freddie Mac. Primary Mortgage Market Survey. 30-year Fixed Rate Mortgages Since 1971, national averages. Updated weekly, current report is for the prior full month.
6Mortgage-X Most recent weekly rate of 30-year Fixed Rate Mortgages, national average.
7Zillow.com Median value of homes sold in the United States during the month, weighted according to the population of each area. The Median is the midpoint value with equal numbers of homes selling above and below this value each month. Medians tend to remove the effect of outlier values. Revisions in bold
Issue #6-5. © Copyright Rick Sohn, Umpqua Coquille LLC.

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West coast log and lumber exports decrease 33% YOY

PORTLAND, Ore. May 23, 2013. Log and lumber exports from the West coast plummeted in the first quarter of 2013 according to a Forest Service research economist. Log exports dropped 33 percent: from 362 million board feet in the first quarter of 2012, to 242 million board feet in the first quarter of 2013. However, the total value of log exports increased more than 27 percent, from $232 million to $297 million.

Meanwhile, lumber exports dropped by 91 million board feet in the first 3 months of 2013 compared to the same time last year.

“The West coast lumber merchants exported only 143 million board feet of lumber in the first quarter of 2013 compared to 234 million board feet in the first quarter of 2012,” said Xiaoping Zhou, a research economist with the agency’s Pacific Northwest Research Station. “The value of first quarter 2013 exports fetched $153 million compared to $156 million in 2012. This means wood products coming from West coast markets are getting more expensive and increasing in value per unit.”

Zhou compiled the statistics from the U.S. International Trade Commission and from Production, Prices, Employment, and Trade in Northwest Forest Industries, a station publication that provides current information on the region’s lumber and plywood production as well as employment in forest industries.

Other highlights:

• Total U.S. log exports increased by 11 percent in the first quarter of 2013. The dollar value also increased by 12 percent over the first quarter of 2012.

• Total U.S. lumber exports increased by 2 percent (from 731 to 747 million board feet). The value increased by 8 percent in first quarter of 2013 compared to the same time in 2012.

• West coast log exports from Alaska, Oregon, northern California, and Washington, totaled about 242 million board feet in the first quarter of 2013. Oregon and Washington supplied 94 percent of these logs.

• During this same time period, about 88 percent, or 136 million board feet of the West coast lumber export, was from Oregon and Washington.

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Framing lumber prices hit an 8-year high last week as the US housing and construction sectors rebound

Framing lumber prices hit an 8-year high last week as the US housing and construction sectors rebound.

lumberA rebound in the US housing market, rising housing starts, and increased foreign demand brought framing lumber prices to an eight-year high last week of $423 per 1,000 board feet. That’s the highest price for the lumber used in the construction industry for framing new homes since the first week of March in 2005 (see blue line in chart). Framing lumber prices last week were 42.4% higher than a year ago, following year-over-year gains of more than 40% in each of the three previous weeks.

Prices for lumber futures contracts sold on the Chicago Mercantile Exchange (CME) rose by almost $5 per 1,000 board feet last week to $395, from $380.30 the previous week. Except for a slightly higher price of $390.50 in mid-February, lumber futures prices are at their highest level since the last week of March in 2005 (see red line in chart).

MP: The rebound in lumber prices last week to an eight-year high is more evidence that a robust recovery is underway in the US housing and construction markets.

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New records for lumber, logs, housing starts

New records for lumber, logs, housing starts

February 4, 2013

By Rick Sohn, PhD
Umpqua Coqullie LLC

New records for lumber, logs, housing starts, building permits, and unsold inventory, while mortgage rates remain low.  Consistent annual improvement  is expected.  Five-year data of lumber, logs, housing, and mortgage statistics are shown below.

  Prices in Dollars per Thousand Board Feet

Jan‘13 Dec’12 Nov‘12 Oct‘12 Dec‘11 Dec ’10 Dec ‘08
Southern Oregon Studs1 $335 $318 $ 300 $273 $220 $235  $140
Southern Oregon Logs2 Not avail. $607 $ 588 $570 $549 $533  $434

Thousands of  Housing Units

US Private Housing Starts3 954 851 889 697 539 560
US Private Building Permits3 903 900 868 701 632 654

Months of  Inventory of Unsold Homes

 Portland OR Unsold Home inventory4 3.6  4.2    3.8 5.3 7.9 14.1

Percentage interest rate

30-year Fixed Rate Mortgage5 6  3.42  3.35    3.35    3.38 3.96 4.71 5.29

 

Interpretation

Supply and demand are so much a part of the wood products industry prices.  Both housing starts and building permits posted new highs, over 900, and the highest since 2008.  Production capacity at the mills and in the woods remain constrained, pushing prices higher.  Stud prices at $335 are at a 7-year high, while log prices at $607are at a 6-year high.

Logging companies do not have the cable yarding capacity they had 6 years ago, and the wet season constrains logging to gravel road systems, which decreases runoff of mud into streams.  This year, many companies do not have as many logging units prepared for winter work, which also pushes logging prices higher.

The Financial Times reports a surge in March lumber futures to a high of $380 in mid-January, with a high near $400 in late December, while currently over $350.   The futures prices surged nearly 45% in 2012, as demand rose.  The lumber and timber supply constraints discussed above, along with demand from China, and the Canadian pine beetle epidemic, have all contribute to the increased prices, according to theTimes.  Paul Jannke of Forest Economic Advisors in an interview with the Times, forecasts a 10-15% increase per year “for the next 3 years at least.”  Industry predictions are for a 20% rise in homebuilding in 2013, over 2012.

The healthy log and product prices will be short-lived if woods capacity increases and mills jump into more production by adding shifts, in excess of the increase in demand.  Temporarily, logging capacity will limit the growth.  Fortunately for the business, producers are reticent to increase production at the still-anemic levels of housing starts and building permits, compared to the historic levels, where normally housing is above 1.5 million starts and permits.  This allows companies to recapture some of the losses of the last 5 years and become healthier.

Data reports used with permission of:

1Random Lengths.  Through Sept. 2012, 2”x4”x8’ precision end trimmed hem-fir stud grade from Southern Oregon mills.  Starting Oct. 2012 the stud grade was consolidated with and is now reported as  Kiln Dried Studs, Coast Hem-Fir 2x4x8’ PET #2/#2&Btr. Price reported is Dollars per Thousand Board Feet, generally the third week of the month.  One “board foot” of product measures 12 inches by 12 inches by one inch thick.

2RISI, Log Lines.   Douglas-fir #2 Sawmill Log Average Region 5 price.  Current report is for the prior month.  Dollars per Thousand Board Feet of logs are reported using standardized log measurements from the “Scribner log table,” which includes expected saw trim.  This is much larger than a product board foot.

3 Dept. of Commerce, US Census Bureau.   New Residential Housing Starts and New Residential Construction Permits, seasonally adjusted, annual rate.  Current report is for the prior month.   Recent reports are often revised in bold.  Also, major revision made each May, reaching 2 1/2  yrs back.

4Regional Multiple Listing Service RMLSTM  data, courtesy of Janet Johnston, Prudential Real Estate Professionals  Broker, Roseburg, OR.  Inventory of Unsold Homes (Ratio of Active Listings to Closed Sales) in Portland Oregon, for most recent month available.

5Freddie Mac.  Primary Mortgage Market Survey.  30-year Fixed Rate Mortgages Since 1971, national averages.  Updated weekly, current report is for the prior full month.

6Mortgage-X Most recent weekly rate of 30-year Fixed Rate Mortgages, national average.

Issue  #6-1. © Copyright Rick Sohn, Umpqua Coquille LLC.   For permission to reprint, e-mail rsohn@umpquacoquille.com

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Wood products & home construction bucks bad economy

Wood products & home construction bucks bad economy

January 8, 2013

By Rick Sohn, PhD
Umpqua Coqullie LLC

Continued strength in wood products and home construction, against a backdrop of a continued sluggish economy. Four-year market trends of lumber, logs, housing, and mortgage statistics are shown below.

chart-sohn-jan2013


Interpretation

Stud prices, and other wood building product prices, have been strengthening since October. Outside of a brief spike in 2012, the studs are the strongest since 2006. Their strength should be more sustainable this time. But log prices are also increasing, causing the manufacturers to comment. But no one is complaining too loudly about the improved business climate and volume of sales recovery, which is still in its infancy, at the still-historically low new construction rates. The recovery for manufacturers ranges from excellent to just fairly steady and cautious. Log prices are still historically low, but are rising quickly this winter. From what I have been hearing, I would guess that next month log prices tracked here could print above 600, which would be the first time in 5 years.

Since January, either housing starts or building permits has set a new high. This month is no exception, with a new high for permits of 899, which is the preliminary number. Could it break 900 for November when corrected next month? If so, that would be a first for either housing starts or building permits, since 2008.

The monthly 30-yr fixed rate mortgage rate posted another drop to 3.35%. The most recent week is up to 3.37%, could just be related to the end of the year.

Looking at the larger financial picture and in the post-election environment: In mid-December the Financial Times reported that the Federal Reserve plans to hold interest rates near zero while unemployment is above 6.5% (November, 7.7%), as long as interest rates do not rise above 2.5% (November, 1.8%). This connection between monetary policy and the state of our national economy is unprecedented. Further, in a third “quantitative easing” the FED also increased its purchase of mortgage backed securities from $40 billion to $85 billion per month, which is also slated to continue until unemployment drops significantly. These targets, designed to prop up the economy, have spawned speculation as to when interest rates would rise. The FED projects 2015. If unemployment continued to fall at the current rates it could reach 6.5% at the beginning of 2014. But many economists feel that 2015 or 2016 (or even 2018) is more likely, due to a projected rise in unemployment as those who had stopped looking for work, re-enter the workforce. Further complicating issues include, the fiscal cliff, a new middle east war, or unresolved eurozone issues. All of these actions and potential issues portend a continued slow rate of recovery.

Data reports used with permission of:
1) Random Lengths. Through Sept. 2012, 2”x4”x8’ precision end trimmed hem-fir stud grade from Southern Oregon mills. Starting Oct. 2012 the stud grade was consolidated with and is now reported as Kiln Dried Studs, Coast Hem-Fir 2x4x8’ PET #2/#2&Btr. Price reported is Dollars per Thousand Board Feet, generally the third week of the month. One “board foot” of product measures 12 inches by 12 inches by one inch thick.
2) RISI, Log Lines. Douglas-fir #2 Sawmill Log Average Region 5 price. Current report is for the prior month. Dollars per Thousand Board Feet of logs are reported using standardized log measurements from the “Scribner log table,” which includes expected saw trim. This is much larger than a product board foot.
3)  Dept. of Commerce, US Census Bureau. New Residential Housing Starts and New Residential Construction Permits, seasonally adjusted, annual rate. Current report is for the prior month. Recent reports are often revised in bold. Also, major revision made each May, reaching 2 1/2 yrs back.
4) Regional Multiple Listing Service RMLSTM data, courtesy of Janet Johnston, Prudential Real Estate Professionals Broker, Roseburg, OR. Inventory of Unsold Homes (Ratio of Active Listings to Closed Sales) in Portland Oregon, for most recent month available.
5) Freddie Mac. Primary Mortgage Market Survey. 30-year Fixed Rate Mortgages Since 1971, national averages. Updated weekly, current report is for the prior full month.

6) Mortgage-X Most recent weekly rate of 30-year Fixed Rate Mortgages, national average.
Issue #5-12. © Copyright Rick Sohn, Umpqua Coquille LLC. For permission to reprint, e-mail rsohn@umpquacoquille.com

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